WEALTH BUILDING: THE WHY

This is a “wealth building secrets” series. In the previous post we looked at how to create wealth. Wealth creators continuously learn from their own financial independence journey, other people’s financial freedom journeys and from the financial environment around them. Personal finances are actively managed. This is why:

• Unfortunate Periods. The recent pandemic taught us that things can and do change drastically from time to time. Unfortunate and unexpected events such as these require proper planning. An emergency fund comes to mind. Never be caught unawares. Most importantly, the constant effort to change our circumstances for the better can never be replaced. In great times we prepare for the not-so-great events. The culture of saving and investing should be maintained. Even if this time proved to be your worst, learn from it and be assured that there will be better times to grow again.

• Economic Cycles. The economy in its nature fluctuates. There are periods of economic expansion and economic contraction. The changes are positive during the periods of expansion with higher employment rates and high consumer spending. During the contraction periods even interest rates are not favourable. We are not in control of the economic conditions, but we can try and manage the impact. During the expansion period, we invest as much as we can to take advantage of the growth that happens in the corporate world. We buy stocks and other investments and take advantage of the favourable economic environment. The contraction periods like recession and depression are guaranteed. Those are the times when we tap into the reserves to get some relief. Always store as much of your harvest as you can in the reserves. I tell my 19-year-old to invest 50 percent of his income. And when he gets unexpected monetary gifts, he often invests 80 percent. Because the culture needs to be cultivated.
  
  

• Changes in Economic Factors. Economic factors constantly change. These include interest rates, policies by government, tax, inflation, employment, etc. All these factors are not in our control but determine how our investments perform. We look at the economic history to predict where these are going. Often, the pattern does not change. But no one knows without any doubt how the economy is going to behave. Our efforts to build our wealth to survive the storms should be constant. We save and invest irrespective of the economic conditions. We do this because of the uncertainty.

• Changes in Government Policy. Policies such as monetary and fiscal policy will keep changing and thus affect the personal finance decisions of individuals. Interest rates and tax are some of the factors that government will keep changing to stabilise the economy. A lot of these policy changes can discourage saving and investing. But there are some that favour the investors like the tax-free savings account. This is one tool that should be maxed every year. Keep informed in order to identify what profits your portfolio and what does not. A financial plan should be flexible to allow the changes as new laws get introduced. Strategies change with the change in the environment but building wealth is constant. We actively manage our personal finances to lower the costs that come with the policy changes and maximise the gains.

• Globalisation. Have you noticed how the international events affect how we do things? We suddenly think in dollars. Our finances are shrinking due to the decreasing and fluctuating values of our currencies. We also experience the world in international currencies. Also, more concerning is that the crisis that happens in other parts of the world manages to hit at the individual's wallet in a different territory. Case in point, the conflicts between foreign countries. There is a case for a geographically diversified portfolio. Personaly, my family typically invests in local stocks, Asia, US and other emerging markets. Geographical diversification does help in minimising risk. Developed markets give more stability whilst the developing markets usually provide higher returns. Do try to keep up to date with the global markets.

What is the “WHY” of your wealth creation journey? Have you started yet? Ask us any questions. Please share the article.

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BUILDING WEALTH

For most people building wealth sounds like mission impossible. This is not because of the complexity of it but the lack of know-how, commitment and consistency. Wealth creation is an ongoing exercise and a journey that requires intent. A shift in the mindset is mandatory as one needs to choose a completely different way of life to what is familiar. The following are the essential steps to take to gain control of one’s finances:

• Know What you Own. Everyone who actively seeks financial freedom knows exactly what they own. They take stock of own assets and liabilities. The starting point is making a list of all the assets, income and all liabilities. This will assist in drawing the strategy for growing the assets and reducing the unwanted liabilities using the income earned. This is also known as determining your portfolio.
• Asset Allocation. To gain financial independence, one also needs to cushion whatever assets they have. We do not want to lose what we already own. The cushion can be in a form of portfolio diversification. The point above is about determining one’s actual portfolio. And right now, we are balancing it to ensure that the assets are spread across various asset classes i.e., cash, bonds, real estate, stocks, commodities, etc. This is known as asset allocation. Asset allocation is always based on one’s age. Younger individuals can afford a higher risk whilst those closer to retirement take lower risk and therefore, lower returns.

  

  Image by Mbini Kutta of SafeInvestingSA
  
  

• Tax Avoidance. Taxation is one of the biggest bills we pay annually. Tax avoidance is a legal way of reducing annual taxes. Good asset allocation ensures that the tax bill is minimised. The wealth creators always pay as little tax as required by the law. One has to understand taxation and tax benefits of various asset classes.
• Balancing the Portfolio. Within each asset class there is always room for improvement. There are constant changes in the world of investing. Individuals that are seeking financial freedom are constantly shifting their assets around to maximise the returns. Right now, we have a real estate heavy portfolio at 56% with stocks at only 12%. We are trying to get our stocks to a similar value as our real estate assets. Our focus is on growing both local and offshore stocks. We are also set on growing our retail bonds.
• Lifestyle at Retirement. Retirement is also to be taken into consideration, as the lifestyle may need to be maintained. Downscaling should be for reasons other than insufficient funds. Some people prefer to retire early and others enjoy the kind of work that they do. The main reason people embark on seeking financial independence is to be able to do what they want with their lives without the need to get income from sources outside their assets. That helps in buying options like early retirement or slowing down by working part time. Being stuck at a job one does not want can pose a huge health risk.
• Debt Reduction. Most people that I have assisted with finances struggled with making a choice between debt reduction and asset accumulation. One needs to understand the reason they find themselves in debt and why they need to get rid of it. Consumer debt will always pose a risk on achieving financial freedom. In most cases the returns on investment are lower than the cost of debt. Eliminating consumer debt is an investment on its own. Always keep this in mind.
• Wealth Transfer. One of the most important aspects of building wealth is preparing the heirs for wealth transfer. This requires a lot of continuous knowledge transfer and mentoring. Your children have to understand most of what you know and do to build your wealth. It is a matter of passing a baton.
• Influence and Association. Finally, the company we keep will always be a factor. To ensure that we stay on course, we have to surround ourselves with like minded individuals. Fortunately for us, we live in the world with abundance of knowledge and social media with individuals that share similar goals. The more of personal finance we consume, the better are our choices.

How far are you in your wealth creation journey? Have you started building welth yet? Ask us any question. And please share the article.

Thank you for visiting Safe Investing SA. For daily motivation please like us on Facebook, Twitter and Instagram.

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